Indian companies struggle to achieve financial closures for Australian mine acquisitions

The acquisition of coal assets by Indian cos such as GVK Power, Lanco Infra & Adani Enterprises last fiscal is now starting to bite with rising debt.

MUMBAI: The acquisition of coal assets by Indian companies such as GVK Power, Lanco Infratech and Adani Enterprises last fiscal is now starting to bite with rising debt, inadequate cash flows and a sharp slide in their market capitalisation.

Given the concerns over their rising debt and weak performance of their existing business, the market capitalisation of these companies have fallen by 60-80% in the last two years. The biggest challenge that these companies face now is the ability to achieve financial closures on their Australian projects, especially when their cash flows from existing businesses are insufficient and with the high debt to equity. In addition, low stock valuations render additional equity infusion imprudent. Selling stakes in coal mine will not be viable either since coal prices have corrected by close to 30% from their peak thereby reducing the mark-to-market worth of these assets.

"When these companies acquired these assets, they expected coal demand to continue and did not foresee the various regulatory and economic risks involved. Now the coal prices have corrected and are on the downward trend. These companies will have to see one entire down cycle before these acquired assets are valued like earlier." said a fund manager who spoke on the condition that he would not be named.

GVK Power has a stake of close to 10% in Hancock, its Australian mine, while 90% of the equity is controlled by a private company owned by the promoter. Together, they will need to invest around Rs 55,000 crores to develop the coal mine and related infrastructure. Its debt-equity ratio has hit an alarming level of four with a debt of around Rs 14,300 crore. Its cash flows have been weak due to the poor performance of its power business due to lack of gas availibility and cost overruns in its airport business. The company's stock price has plunged 70% in the last two years. According to Deepika Mundra of JP Morgan, the company's return on equity will remain negative due to near doubling of interest costs. Also its interest coverage or EBIDTA relative to interest outgo is low at 1.3 and may worsen if operating performance deteriorates further. ""We are considering raising funds through a stake sale and debt. However, we cannot reveal the exact structure"". said Isaac George, CFO of GVK Power.

At about seven times, Lanco's debt to equity is the highest amongst the three companies. It has a debt of Rs 32,000 crore and needs an investment of nearly Rs 25,000 crore to develop the mines. However, the company has already defaulted twice in the current year as it is facing huge losses in its power business which has resulted in an operating loss. This means the company is not earning enough to cover interest costs leave alone repaying the loan. Any improvement in the near term appears difficult considering falling commodity prices and the bleak demand scenario. Lanco's officials were not available for comment.

Adani Enterprise on the other hand expects to incur Rs 22,400 crore capex on the Australian mine project by 2016. The company's debt is close to Rs 70,000 crore, 3.5 times its equity. The company's current cash flows from its power and port businesses are not adequate for such a capital expenditure and the company will have to look at increasing its debt further.

"Although Adani Enterprise could have turned free cashflow positive by FY15, its Australian plan implies that its de-leveraging (ability to reduce debt) story is unlikely to unfold for several years. Its gearing concern would increase further if it opts to increase the capex towards Australian project", said Amish Shah, analyst, Credit Suisse in a recent report.

However, in terms of financials, Adani Enterprise is relatively in a comfortable position when compared to GVK Power and Lanco Infratech. Its earnings before interest, depreciation, tax and amortisation (EBIDTA) is twice its interest expense as compared to 1.2 for GVK and Lanco.

"It has already infused equity and is in talks for debt raising with various bankers across the globe. It will be able to achieve the financial closure by August 2013", said a person who is well briefed on Adani's financials.

The market capitalisation of these companies has fallen by 60-80% in the last two years and diluting equity at such low valuations may not be the best option. Under such circumstances, selling some of the existing assets in the form of capital projects and debt restructuring are feasible options to meet financing needs.

While Lanco Infratech and GVK are considering selling stake in their road projects, Adani Enterprise may raise more debt. It will be crucial for these companies to surmount these challenges till their overseas ventures start generating strong cash flows.